Food prices are rising and it's going to get worse

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The cost of the weekly grocery shop has increased by a third since the credit
crisis struck, and food inflation is expected to get even worse as a result
of poor harvests and rising populations.

Amid the general hand-wringing about the economy, the publication of something as innocuously named as the Food Statistics Pocketbook went almost unnoticed last month.

But this booklet from Defra, the Government's agriculture department, tells a story as horrific as any tale recounted around the fireplace this Hallowe'en a story that becomes very real every time we pull our credit card out at the end of the weekly shop. The pamphlet is an analysis of food prices and their effects on society, and the numbers are stark. The price of food in Britain has risen by a third since the credit crisis began in 2007, and shoppers on lower incomes are compromising on the quality and healthiness of food because of this.

British shoppers have been disproportionately hit by the rises customers in France and Germany have seen their food costs rise by 13pc in the same period and are altering their behaviour in order to survive. Defra figures show that those on low incomes have cut down on fruit and vegetables (fruit prices have risen by 34pc since June 2007) and are also cutting back on the total calorie content of the food they buy. Those with incomes in the bottom tenth have cut the calorie content of their food purchases by 9pc since 2007.

Their plight is likely to get worse. While food price inflation has stabilised over the past three months prices are now increasing at just 2pc a year, according to figures in the consumer prices index this is likely to be the calm before another violent storm. Poor harvests and rising populations are forecast to push food inflation up. The Food Affordability Barometer, developed by European Food & Farming Partnerships (EFFP) in conjunction with Morrisons supermarket, expects food inflation to peak at about 4pc by the end of 2013.

"Over the coming months we will see inflation across the sector in the prices of grain-based food products, and in the following months in the prices of meat and dairy products," said Sion Roberts, senior partner at EFFP. Grain and soya prices have risen as a result of poor harvests, and this feeds through to higher meat prices as the cost of feeding the animals rises.

Dalton Philips, the chief executive of Morrisons, said 2013 "will be a little tougher than this year". "We'll be working hard to insulate customers where we can," he added.

As anyone who has visited a supermarket this year knows, it is hard to feel "insulated" from food price rises when your till receipt shows a higher number every week. However, Richard Dodd, head of campaigns for the British Retail Consortium (BRC), the trade body, said supermarkets were doing everything they could to keep costs as low as possible.

Customers, he said, were taking advantage of supermarkets' discounts and offers on a daily basis. "A third of the food that shoppers buy is on some sort of promotion," he said. "Customers are homing in on this in a big way." He claimed that supermarkets were squeezing their own profit margins as tightly as possible in order to protect consumers from rising costs.

Martyn Jones, corporate services director at Morrisons, added that the supermarket was doing all it could. Its (Euronext: ALITS.NX - news) operating profit margin is 5pc, meaning that it makes 5p for every pound spent in its stores. "By most industries' standards that is very low," he said.

Morrisons, like rival supermarkets, has been dealing with its shoppers' pinched purses in a variety of ways. It has expanded its economy range, known as Savers, to further stores and a larger number of products, and said sales of the lower-priced brand were up by 40pc year on year. It has started producing smaller packs of vegetables, so that customers can cut down on food waste by buying only enough parsnips for dinner, for example, for 49p.

"Our customers are not accusing us of profiteering," he said of the rising prices. "They can see that we are competing in a larger marketplace." However, he added that one of the results of rising food prices was that customers were becoming far less loyal. "They are voting with their feet and their purses far more," he said.

James Walton, chief economist of the supply chain analyst IGD (Berlin: IF8.BE - news) , said customers were already changing their shopping strategies to deal with the price rises and that there was more of this to come. IGD works to help the food and grocery industry to deliver more for consumers, and interviews 1,000 shoppers a month about their shopping habits.

Mr Walton said that when food prices started rising in the mid Noughties, consumers were unprepared because they had seen so many years of food prices falling relative to income and other goods. "We were taken by surprise but now we are veterans," he said.

He said customers had become "alert and agile" since food prices had begun to rise, and had a number of strategies to deal with rising costs. "Shoppers are very quick to change products when prices rise," he said. "They are investing a lot of effort in the food shopping process. In the past, shoppers were habitual they just bought the same thing but now they are more likely to be considering different options."

He said rising food costs had come at the same time as a digital revolution, meaning that people had better options for shopping and comparing food prices.

"There are new options such as discount stores Aldi and Lidl," he said. "Although they have been around for a while, they have changed their strategies. Their rising market share now comes from middle-class shoppers who try their new offerings and come back for more."

Although customers were buying the cheaper brands, he said, they were also splashing out at the top end of the market. "The same shoppers shop in both Lidl and Waitrose," he said. "They buy premium brands and value brands."

Morrisons' Mr Jones agreed. "Our customers buy the Savers brand and use the money they have saved to buy premium products, often at the weekend."

Mr Walton said supermarkets had "a lot of levers to pull" when dealing with food price rises. "There has been a drastic step up in promotional activity as well as an adjustment of ranges," he said. "Value and own-brand products are being made more attractive and given much more shelf space." He said supermarkets wanted to give the impression that they were helping consumers. "Supermarkets have realised that their shoppers are in motion they are less loyal and they will move around. This is a huge game of musical chairs, and everyone wants to hang on to as much market share as they can until the music stops and the economy starts to look up. It's an exciting time."

For customers who do not feel that way, as their food bills continue to rise inexorably, the Action Points, right, should help them cut their grocery bills.

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